Sustainable Businesses

Building a business that will stand the test of time

By Paul DeffenbaughEditorial DirectorPosted May 01, 2018

According to the U.S. Small Business Administration (SBA), “about half of all new establishments survive five years.” About a third survive beyond 10 years. The SBA says these rates have not changed much over time.

I raise this issue because as the economy is going strong, we’re seeing lots of new businesses established. According to the Kauffman Startup Activity Index Report, the country saw sharp increases in new entrepreneurial activity from 2014 to 2015. (The Startup Activity Index was at its lowest point in 20 years in 2013.) In 2016, start-up activity increased just slightly.

The data for construction companies is murkier, but anecdotal evidence and increasing overall construction activity would indicate our industry is following—or maybe even leading—the national trend. After all, the barrier to entry in the construction industry is relatively low. Have a truck? Have tools? You can likely start a contracting business within a week.

But how do you make it stick? Isn’t that the big question for our industry? After all, if construction activity follows the national trend, half of the businesses started in the last couple of years will fail.

That’s why I like to focus on building sustainable businesses. There is a lot of information out there to help people run and improve their contracting companies, and, in fact, our own columnist, George Hedley, writes about this issue every month. There are, in my book, two overriding issues associated with building a sustainable business.

The first is profitability. That seems like a no-brainer, but unless you’re pricing and bidding jobs that will give you a profit—a return on the investment of your risk—you won’t be in business very long. In an industry that is uniquely geared to driving costs down and rewarding the lowest bidder, getting your profit margin is tougher than you think.

But think about it this way. If you can’t get a profit on a job, then you probably would be better off staying at home, watching TV and eating nachos. Consistent, regular profitability is essential to building a business that’s in it for the long haul.

The second overriding issue is managing cash flow. Even if you are profitable, you still risk your business if you’re not managing your cash flow. If you are borrowing money from future jobs to pay for materials or labor on a current job, you’re in a tough spot. It’s possible to run a profitable company, yet get behind the curve on cash flow and end up failing because you can no longer meet your commitments.

I know a lot of contractors who saw a big number sitting in their checking account and got the idea they were suddenly rich. They forgot the money was spoken for, and they spent it on a capital improvement or more overhead or some other business-related item, but not where that money should have been earmarked. Before they knew it, they were running cash flow negative and putting their business in harm’s way.

If you do build a company with a sustainable business model, the benefits are incredible. You provide a career for yourself as well as all of your employees. If your offspring want to come into the company, you can set that up and do an end run around the difficultly of the current generation finding decent jobs. You also establish a stable, reliable center to your community that it can rely on.

But most importantly, in this time of acute labor shortages, your sustainable business provides more than just jobs to the trades. It provides careers. A growing company allows good employees to take advantage of their developing skills to rise up the ladder and earn more money.

Flatlined companies, failing companies, only put their employees on the road to the next company. And for trade workers, that often means leaving the construction industry entirely. That’s a bad thing because we lose their experience and knowledge, and we have to replace them from a pool of lessqualified candidates.

And for you, as the business owner, it may be even worse than that. If your good employees see your company is not sustainable or growing, they may choose to start their own businesses (remember, the barrier to entry is low), and you suddenly have a new competitor.